A high solvency ratio indicates that the corporation has sufficient funds to meet its financial responsibilities

Does your health insurance company have the money to pay your claim? Check here A higher solvency ratio is usually regarded as an indication of reliability

If you want to buy a health insurance policy, one of the factors you should look into is the solvency ratio of the insurer. This ratio will help determine your insurer's ability to repay the amount when you make a claim.
According to Irdai guidelines, all companies are required to maintain a solvency ratio of 150% to minimise bankruptcy risk. Solvency ratio helps identify whether the company has enough financial buffer to settle all claims in extreme situations. Hence, it is a good indicator of an insurance company’s financial capacity to meet both its short-term and long-term liabilities.

The solvency margin is calculated by comparing a company's obligations to its current assets. To put it another way, the solvency ratio is computed by dividing a company's after-tax operating income by its debt liabilities.

Solvency ratio of general, health and reinsurance companies (FY 2020-21)
Source: Irdai annual report 2020-21

This ratio is available on each insurer’s website. Do make sure to finalise your insurance company after checking the solvency ratio.

Why solvency ratio is important
Insurers receive hundreds of claims from their customers regularly. To process all these claims and pay the monetary benefit to the beneficiaries, the company needs to be financially stable and have adequate funds. The solvency ratio is a simple indicator to know how good or bad the financial strength of an insurer is.
A low solvency ratio indicates that the corporation may struggle to meet its financial obligations and make timely payments. In contrast, a high solvency ratio indicates that the corporation has sufficient funds to meet its financial responsibilities. A higher solvency ratio is usually regarded as an indication of reliability.

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This story originally appeared on: India Times - Author:Faqs of Insurances